Bias in Personal Finance

Personal finance is a very nuanced, complicated, and personal topic for every person involved.  That said, the basic formula underlying the entire process for wealth accumulation and retirement isn’t a secret.  Spend less than you earn, invest the remainder, and eventually, you’ll succeed.  Even most of the specifics of that path are well worn and not particularly complicated.  Nobody talks about how the bias in personal finance is baked into that simple advice.

Inherent Bias in the Simple Path to Wealth

The problem is that by distilling the process down to a simple formula and a single path ignores the inherent bias in personal finance already in the system. All the players aren’t starting from the same base character with the same base stats. I’ve personally dedicated an entire page and series of posts to explain the simple path to financial independence but needed to address the systemic bias in this stand-alone post. Feel free to read that next: The Personal Finance Path to Financial Independence.

I wish I could fix it

This post is not an attempt to fix the bias in personal finance since no single article is capable of such a feat. It will take a coordinated effort by all those involved to start moving the system away from the bias it inherently has built up over time. I sincerely hope we continue to work in that direction. The point of this article is to help people recognize the bias in personal finance, those who might have a hard time seeing it otherwise like I admittedly did. 

Magic Eye: We all stared at those

Like staring at one of those Magic Eye paintings sold from a kiosk at what I assume was every mall in America in the 1990s, bias can be hard to see. Especially hard if you don’t know what to look for. Even harder if you aren’t on the receiving end of the downstream effects. I know I had a hard time wrapping my brain around systemic bias in personal finance in general until I could find a way to relate to it in terms I was more familiar with. I’m sharing that with you below in the hopes it helps one more person the way it helped me.

To use an analogy, it would be like finding a recipe for your favorite entree or dessert.  This recipe now gives you the full ingredient list and the step by step instructions.  You should be good now, correct?  It should be simple, and I’m sure it’ll come out exactly as planned, looking like the photo in the recipe.  The short answer is yes… but also no.

Ingredients are ingredients, right?

Knowing the ingredients list and the instructions for a dish isn’t exactly the same as guaranteeing success.  First, let’s start with the ingredients:  

• Do you even have all of those ingredients? 
• Can you afford those ingredients? 
• Even if you could buy them, do you even have access to those ingredients? 

Simply knowing what ingredients are in a dish is very different from actually having them or being able to procure them at all. Your recipe card for pterodactyl steaks grilled over moon rocks just became more of a curiosity than something you could actually cook.

We all have the same kitchen & tools, right?

Second, let’s look at the tools needed for the job:

• Do you have the utensils? A fork isn’t the same thing as a whisk in every recipe.
• Does your kitchen have the pots, pans, and bakeware needed?
• Do you have a stand mixer?
• Do you have an oven that generates those temperatures?
• Is your kitchen the size of a shoebox?

As you can see, even if we have the ingredients we might be missing the tools to produce the dish.  Some dishes absolutely require a specific preparation method, temperature, heat type, or similar tool that you may not have in your kitchen. 

Coming from my own experience, cooking anything is significantly easier with the right tools for the job.  You can sometimes make it work with missing or inadequate tools, but it will be an uphill battle the entire time.

You’ve made this before, right?

Third, let’s look at the time and experience needed in the recipe. People underestimate how important experience is in cooking a specific dish. Having made a dish before, sometimes numerous times, provides a cook with invaluable knowledge on how to get it right the next attempt. Maybe your oven needs to be set 15 degrees higher and the dish needs to stay in there 5 minutes longer. You would know that if it was something you’ve cooked a hundred times.

Do you have enough time to cook this recipe? The recipe might require a 2-hour rise or overnight resting of the dough and trying to short that requirement will result in a failed dish. Some dishes absolutely require the time stated and will fail otherwise. Often overlooked is giving yourself enough time to fail at it initially. The first meeting with the in-laws might not be the best time to try to impress them with a French macaron recipe you’ve never attempted.

Stupid macarons… I’ll get them right eventually.

Side note: those little French macaron cookies are crazy expensive precisely because they are hard to make. Even harder to make well enough to sell them I’ve found. The ingredients are hard to find and expensive, and the recipe varies by your location’s elevation and humidity. It is annoying how easy they make producing them look on the Great British Baking Show. I’m not showing my macarons to Mary Berry any time soon.

Speaking of macarons being hard to make, do you have the skills implied in the recipe? Some techniques take a lot of skill and practice, and ‘Step 2’ of the recipe may not make that clear. In fact, they usually assume you know exactly what they mean when instructing you what to do. They are trying to be as succinct as possible in the recipe and may not consider the reader isn’t on their level.

That gif recipe didn’t fully explain the method? Weird

Sauteing vegetables is the same as sweating them, right? No?!? Oops. Recipes are often presumptuous in their writings, assuming the reader even knows what that step is referring to technique-wise. There are material differences in sweating vs. sauteing or whisking vs. folding or baking vs. broiling, and the recipe maker definitely intended you to do one of them over the other.

One of our favorite shows on Netflix is Nailed It, a show featuring amateur bakers attempting to recreate elaborate cakes and pastries. The entire premise of the show is based on the amateur chefs being provided all the ingredients, the instructions step by step, and a fully-stocked kitchen and still failing to produce the desired result. Not just fail, but fail spectacularly in a humorous way to entertain us. It sounds mean at first, but the contestants seem to be in on the fun.

Uh oh… something isn’t right.

Do you know how to fix a dish that goes sideways on you? Experience is one of the best teachers in life and failure one of the most tenured professors. Tasting a dish that isn’t quite right and knowing what can be done to salvage it takes a lot of repetition.

Aspects of success like time, experience, skill set, freedom to fail, and other intangibles are often assumed in recipes and personal finance alike but are absolutely critical to success.  The ability to attempt a dish and fail numerous times before succeeding is a luxury few account for when relaying results.  Some dishes are notoriously hard and involve techniques only acquired through trial and error it seems. 

Macarons cost a fortune when you buy them at a shop because you are partially buying the expertise of the shop capable of making them correctly and looking good at the same time.  You learn through the mistakes and failures, and some people don’t have the ability to fail too many times before succeeding, and that puts them at a disadvantage.

Failing doesn’t mean you are a failure

Attempting the recipe and failing when others succeed isn’t necessarily a failure to follow the simple formula and simple steps.  It isn’t a personal failure on your part. There are a lot of factors at play in your success and your initial failure. Maybe a person’s mom or dad taught them to cook as children or insisted they help prepare meals. Perhaps someone in their life was a professional cook or baker.  

What if the person had better equipment or ingredients since this can matter more than people want to admit. Maybe they tried that dish a half dozen times and failed before producing the successful one they shared with you and others. Perhaps they went to school specifically for this skill set. Maybe they just live in a better part of the world for cooking that dish, which can matter surprisingly.  

Only compare yourself to your prior self

The point is that we often compare ourselves to the version of others that is presented to the world when that version, most often, omits the messier parts of getting to that point and all the trial and error.  All I’m saying is that maybe we shouldn’t consider ourselves bad at trick shots after watching some Dude Perfect videos because they only edited in the one out of the hundreds of shots that actually went in the goal.

Failure isn’t a bad thing, we learn from failures.  It just means that you might need to modify the recipe and get help along the way. It may not even be possible without help.

I hope the analogy helps

This analogy, that I readily admit may not be the best, is how I reconcile the bias in personal finance I don’t personally have a ton of experience facing.  It helps illustrate the systemic, inherent bias in the process that many fail to recognize. Too often people attribute the financial problems people experience to a lack of financial literacy in our country, but that is only part of the equation.  

In the analogy above, this would be akin to teaching people the cooking techniques and expecting them to be “all set” despite having limited or no access to the kitchen or equipment in many cases. The math and steps to financial independence may be simple, but that doesn’t mean every cook is starting off in the same kitchen with the same experience.  Acknowledging this goes a long way to working together so everyone has an equal opportunity to reach financial independence.

Help where you can

We all deserve a fair shot at accumulating wealth and achieving financial independence. I started this blog to share my knowledge of personal finance with others to hopefully close that gap, even a tiny amount. Thanks for joining me along the way.